Analysis and criticism of America's most prominent public intellectual and champion of Keynesian economics. I am part of the Austrian School of Economics, and I critique Krugman's writings from that perspective.

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Tuesday, September 6, 2011

Now, if government would concentrate on the weather, we would have no more hurricanes....

With the latest employment numbers looking bleak, the Usual Suspects are out in droves explaining why after spending trillions of dollars, the economy continues to sink. Leading the way is Paul Krugman, who insists that this continuing downturn exists because the government has been “concentrating” on the wrong thing: budget deficits.

Krugman writes:

I don’t mean to dismiss concerns about the long-run U.S. budget picture. If you look at fiscal prospects over, say, the next 20 years, they are indeed deeply worrying, largely because of rising health-care costs. But the experience of the past two years has overwhelmingly confirmed what some of us tried to argue from the beginning: The deficits we’re running right now — deficits we should be running, because deficit spending helps support a depressed economy — are no threat at all.

And by obsessing over a nonexistent threat, Washington has been making the real problem — mass unemployment, which is eating away at the foundations of our nation — much worse.

The Keynesian explanation of what is happening is pretty straightforward, and Krugman does it on a regular basis (along with Brad DeLong and, to a lesser extent, Robert Reich). Details include:

• The economy operates in a circular motion, with consumer spending propping up business activity, which in turn provides jobs for consumers so that they can continue to spend and give themselves jobs (so that they can continue to spend);

• If marginal taxes on the wealthiest people are not high enough to confiscate much, if not most, of their income, then the rich will “hoard” the money and not spend enough, which slows and ultimately breaks what Reich calls the “virtuous circle” of spending;

• When that happens, government must raise tax rates on the “rich” (Reich calls for a return of the 70 percent marginal rates that existed in 1981) in order to get money into the hands of the “middle class” (which apparently is a creation of the State) so that the spending circle can be revived;

• At the present time, interest rates are very low, which means that the economy is in a “liquidity trap” in which the only way that the spending circle can move is via more government spending, which should be financed by borrowing, and since interest rates are low, the borrowed money essentially is “free;”

• If a person makes a point of discussion that deviates from what has been presented, that person is motivated by hatred of the unemployed and wants people to lose their jobs and wants the economy to tank;

• Thus, in the end, the debate on Keynesian “solutions” ultimately is a debate on good and evil. Those who support Keynesianism are “good” and those who disagree are evil.

In the numerous columns and blog posts Krugman has written in the past few months, the theme is consistent: there can be no intellectual disagreement with Keynesian analysis because the truth of the Keynesian position is self-evident. Anything else is evil and delusional. For example, the “Regime Uncertainty” position that Robert Higgs and others have taken is nothing more than a figment of one’s imagination:

O.K., I know what the usual suspects will say — namely, that fears of regulation and higher taxes are holding businesses back. But this is just a right-wing fantasy. (Emphasis mine) Multiple surveys have shown that lack of demand — a lack that is being exacerbated by government cutbacks — is the overwhelming problem businesses face, with regulation and taxes barely even in the picture.

For example, when McClatchy Newspapers recently canvassed a random selection of small-business owners to find out what was hurting them, not a single one complained about regulation of his or her industry, and few complained much about taxes. And did I mention that profits after taxes, as a share of national income, are at record levels?

So short-run deficits aren’t a problem; lack of demand is, and spending cuts are making things much worse. Maybe it’s time to change course?

While all of this seems to be self-evident to Krugman, there are some important things that are left out. The first is the role of the economist, who is supposed to be able to look beyond the rhetoric and the “man on the street” view that ultimately leads to the “Broken Window Fallacy.” For example, the marginalist position on value is one that is not easily seen or understood by the typical layperson, who is more likely to believe that the value of a final product is determined by its cost of production.

The second is that the typical small business owner is not going to be able to relate how government “job-saving” programs like the subsidizing of corn-based ethanol or the bailout of General Motors has diverted resources from productive to unproductive uses. Instead, the business owner is going to see how people directly are purchasing products and what it costs to make them, and then make decisions from that vantage point.

As I said before, economists are supposed to be able to take in the whole picture, or to contemplate not only what is “seen,” but also what is “unseen,” to quote Frederic Bastiat. In other words, one should expect a journalist to concentrate on what is “seen,” and to miss the aspects of the larger picture. That is excusable, even if it is irritating.

However, it is unexcusable for an economist, and especially one who has the stature of a winner of the Nobel Prize, to concentrate only on what is seen and not only to ignore those important things not seen, but then to personally attack other economists who do their real duties to examine the entire picture and declare that their motivation for doing so is that they are evil and want Americans to lose their jobs.

The truth is that Krugman’s argument is a red herring; had the Obama administration and Congress done nothing but talk about jobs and launch one employment program after another, the rate of joblessness still would be high, and the fiscal picture of this government and this country would be as bad as it is now. The U.S. economy is not doing poorly because of lack of “concentration” by government officials, but because the government stands in the way of an economic recovery.

By bailing out the banks, by bailing out companies, by spending at record levels, and by holding down interest rates, the U.S. Government is preventing resources from moving from lower-valued to higher-valued uses. Furthermore, the government through political intimidation (see the recent raid on Gibson Guitars) and hostile rhetoric against firms that are legitimately profitable is sending the message that private enterprise is the enemy that ultimately must be replaced by state-sponsored enterprise.

There is another problem to this “oversight” issue, and that is the promotion of the wrong view of a “job” itself. As I read the Progressives on jobs, I have come to realize that they (and that includes “economists” such as Krugman) see the “job” solely as a transmission mechanism for income and, therefore, spending.

In other words, the actual services that one provides are irrelevant in and of themselves, or at best are secondary to the income that those providing them receive for their work. In that view, an economy is just one big circle of spending, with “spending” itself taking on a meaning that is quite removed from the actions and desires of consumers.

Spending, according to the Keynesians, is rather impersonal, and it cannot be tied to purposeful behavior by individuals. The value of “spending” is not that individuals are able to purchase goods and services in order to meet their needs, but instead is a mechanism that keeps that “virtuous circle” known as an “economy” moving in the “right” direction.

This is not economics; it is a mechanistic view of the world that ignores individual preferences and the actual movement of resources and factors of production. Unfortunately, people like Krugman add to the tragedy by claiming that those who look to actual economic explanations of this continuing saga by employing the tools of economic analysis do so because they are both stupid and evil. When the “leading lights” of modern academic economics claim that the employment of historically-accepted intellectual instruments is in itself “evil,” then one must wonder about the very future of this discipline.

20 comments:

Anonymous
said...

AFAIK Krugman is not calling for a large tax rise right now - that's a longer term goal, to be pursued once unemployment is low again. Right now the Keynesian prescription is simple - increase the deficit. Deficit decreasing measures are generally to be opposed. Opposition to the Bush tax cut expiry was due to this being a relatively unstimulative way of increasing the deficit (because the wealthy are more likely to keep onto their tax benefits). We were being told we couldn't afford infrastructure spending or a payroll tax cut because it was too costly a way of boosting the economy, but tax cuts for the wealthy were deemed a price worth paying (why? Was any evidence provided to the effect that tax cuts for the wealthy was a -more- cost efficient means of fighting unemployment?) But outside of the political scene (which Krugman does get too caught up in) Keynesians would acknowledge that for stimulative purposes, tax cuts even for the wealthy are better than nothing, and tax hikes counter-productive.

In this post and others you have falsely suggested that if Krugman favours an economic policy, he does so because he thinks it will increase employment. Krugman favours unions, single-payer health insurance, and higher tax rates, therefore he thinks those policies will lift us out of high unemployment. Actually he supports unions to reduce the relative political strength of the wealthy, single-payer to address the long-term budget problem, and higher tax rates on the wealthy for both those reasons.

As for the survey, I don't see how Krugman's comments justify your response. Right-wingers claim that businesses won't invest right bow because they're uncertain about future government policy. Keynesians claim that it's because businesses don't think more investment will be justified by expected sales. Now there's theory either way on this one, but why not just go ahead and ask businesses why they're not investing? The reason businesses are giving for their decision not to invest is the Keynesian one. If they had decided not to invest because they were uncertain about future government actions, why not say so?

Now obviously this survey doesn't prove that Keynesian solutions should be adopted. And there may well be a roundabout explanation such that uncertainty is causing businesses not to invest (by misleading businessmen about future sales prospects) And it may be true that the reason businesses give for why they are not investing us not the underlying reason for our current woes. But at the very least the right-wing talking point as so far stated needs a defence, and needs to be clear about how the claim "businesses are unwilling to invest because of regulatory uncertainty" is consistent with the fact that businesses say that regulatory uncertainty is not a factor in their investment decisions. Without such a defence (and saying businesses can be wrong is not a defence) this talking point should be discontinued. I think it a basic part of my intellectually honesty not to make potentially politically consequential statements if I cannot give them an adequate defence.

"fears of regulation and higher taxes are holding businesses back. But this is just a right-wing fantasy. (Emphasis mine) Multiple surveys have shown that lack of demand — a lack that is being exacerbated by government cutbacks — is the overwhelming problem businesses face, with regulation and taxes barely even in the picture.

For example, when McClatchy Newspapers recently canvassed a random selection of small-business owners to find out what was hurting them, not a single one complained about regulation of his or her industry"

WHAT?????

The good Princeton professor has a dishonesty problem!

Does he ever peruse the sentiments gathered by the Chamber of Commerce and NFIB among other similar groups?Does he ever wonder how a small businessman will pay the Obamacare's destructive tab?Or that nearly a third of medium sized businesses say they will have to drop their insurance coverage because it is cheaper to pay the penalty?

Of course average people presently suffer from a "lack of demand". They are broke thanks to Krugmanite policies which caused the housing bubble. But the Krugmanite argument of "lack of demand" begs the question because it does not explain cause, effect or the solution.

Handing out funny money to a poor populace is a recipe for further consumption of savings and capital when everyone should be tightening their belts and saving. Of course, super-low Krugmanite interest rates are a disaster in the making by impairing long term economic calculation in long term complex investments and impairing even the ability to save.

Thanks again for the poverty you've caused and continue to cause, Krugmanites.

What "cutbacks" is Krugman referring to? Massive federal deficits are a clear indicator that spending increases are the order of the day. Keynesian logic is pretty easy to follow in this regard: deficits should drive up demand, and therefore lower unemployment. One should expect that by now, several years of substantial and increasing deficits should be resulting in lower unemployment, if the Keynesians are correct. Yet the opposite is clearly occurring. Blaming higher unemployment on a few "cutbacks" in the odd federal department seems like grasping at straws.

Pursuant to AP's & Roddis' points above, all that those business surveys are useful for is to highlight what we already know - that we're in a recession! So demand is low. And therefore sales are poor.

Krugman frequently likes to turn this upside down and state that poor sales are the cause and the recession is the effect.

While AP Lerner has been ducking and weaving, another MMTer explained "how we're going to pay it back":

So we "paid back" nearly $59 trillion in the past 11 months without a hitch. The yield on 10-year Treasuries is below 2%. How did that happen? Simple...the Fed debits securities accounts and credits reserve accounts by whatever number it needs to. It's paid back by mere accounting entries. That's it. End of story. No digging up gold out of the ground, no mortgaging our future and best of all, no grandchildren involved. Please send to your Congressional representative.

The MMTers are our greatest allies. Average people don't believe us when we try to explain our present criminal system. The MMTers will explain it with ENTHUSIASUM.

Then get back to us and explain why it is Investopedia says every financial professional should understand something that doesn't exist. Strange I know, but apparently they think there's something to this black magic!

"What "cutbacks" is Krugman referring to? Massive federal deficits are a clear indicator that spending increases are the order of the day."

Revenue reductions also contribute to the deficit. Krugman points to government spending at all levels, usually in real terms and changes from year to year. Personally I think it makes sense to go to the St. Louis FRED site yourself and chart what is important in your view. For example taking the ratio of federal expenditures against revenues gives a nice disturbing uptrend.

Anonymous, I don’t know about Anderson but after I read it here is my take away.

Krugman said: “My usual response has been that I have no idea what drives the price of gold…”He is right and should have stopped there. He knows nothing on the subject. Instead in true form he creates an artificial test tube world to make his point.

He also said: “… I see it record low interest rates strongly vindicate my position”Given the Fed intervention in the fixed income market you have no free market. Thus it tells you NOTHING unless it’s what you want to hear.

You know Anonymous, I sometimes wonder how is it that the US with all it's advantages could fall into a state of paralyzing dysfunction. Then I read comments like yours and it all makes sense. Thank you for the enlightenment.

Krugman says people do ----because they are" stupid & evil." I don't think Krugman has ever made such attributions about peoples motivations, (although I can't say I'd blame him). Gee, this is such an intelligent & academic article & forum for enlightened commentary!

About Me

I teach economics at Frostburg State University in Frostburg, Maryland. We are located on the Allegheny Plateau, and we have cool summers and tough winters.
I am the single father of five children, four of them adopted from overseas and I have two grandchildren. My family and I are members of Faith Presbyterian Church (PCA).